By Richard Crenian
There is a lot of capital out there that has been building up waiting to be spent and that money has now gone into real estate. Is that a good thing or a bad thing? You’re now scratching your head and saying, “Why are home prices going up?”.
Well, because you’ve been sitting at home for 18 months not spending anything. There was also a lack of housing built in the past five years, especially in the US, so now they’re trying to catch up. All of a sudden, prices are shooting up. Why? Well, lower interest rates, not enough supply and lots of demand. So is housing a good investment? Well, today it is. If you own your own house and somebody was knocking on your door trying to buy it, it’s probably worth substantially more now than what you bought it for.
What happens from here? If you have inflation, which we believe is here now, then your house should be worth more money in five years. So there’s a lot of money chasing homes. It is the same with apartment blocks. There is so much money chasing apartment blocks right now. So what does that mean? Well, a cap rate is generally what investors are looking at. A cap rate is how you measure whether or not you should be buying an apartment block. Most apartment blocks were being traded at a 5% cap rate, and in bigger communities, it was 3%.
If I bought something for 5%, and cap rates have now compressed to 3%, I made money. It’s real money that I made on a product. So if you have lots of money chasing real estate deals, you’re going to make money if you have the product. It’s very hard right now to find good product. If I can find some good product, I’m grabbing it, whatever the cost may be. On the other hand, if you’re a value investor like I also am, I’ve been sitting very, very quiet on the sidelines. Somebody described me as a lonely investor because there’s no such thing as a value investment today. If you go into a store today and you want something you have to buy it at full price or someone else will.
For example, Rolex watches have gone crazy. Why? Because everybody wants a Rolex watch When you look at a Rolex Daytona, the prices of have increased from approximately $17,000 to $50,000 CDN from a reseller. There is not enough supply and the demand is huge.
Another example is the vehicle market. I don’t know if you’ve been in and tried to buy a car, but you have to wait up to 12 months in Canada. If you were paying $110,000 for a Cadillac Escalade, now it will cost $160,000 CDN. And you still have to wait. You’ve got chip shortages and labour shortages. The car dealers can’t produce enough cars to meet demand.
Along the same lines, if you were in fashion and you wanted to buy a Yves Saint Laurent bag, Balenciaga bag or any kind of bag, not only are they limited in supply, but because of the demand, companies like The RealReal have been buying the used products and are now selling them for high markups. There’s so much money out there driving up the prices. Again, inflation? Yes. I was introduced to RealReal by my daughter. I walked around the store and I’m looking at all these old sneakers. I’m thinking I would never put my feet in a pair of old sneakers that somebody else had worn.
She goes, “Dad, how much do you think this is worth?” I go, “I don’t know, I probably wouldn’t pay 5 cents for it.” She says, “Yeah, this pair is worth $10,000.” And I go, “What? A pair of sneakers?” The demand for old style nostalgia is crazy right now. I’ll relate this all back to real estate but the point is that there’s a lot of money out there chasing very few products today. If you want a car and your salesperson tells you it’s worth $50,000 and you have to wait 10 months, you write the check for $50,000 and you’re done. There’s no argument. You buy it. If you go into any store and you want something, there are no deals to be had. You don’t go into a Rolex dealer and say, “I want a deal on my Rolex Daytona,” he’ll kick you out of that store so fast.
What is happening? Why is real estate the same way? Well, it’s the same with trying to be a value investor today. There’s no such thing as a value investor anymore. If you want an apartment building, a retail building or even land, and there’s no availability and the vendor says to you he wants $1, he’ll likely get $1.10. Is there inflation? Yes. So, if you’re a value investor you’re sitting on the sidelines. Good luck to you because you are probably sitting in a chair somewhere, lonely all by yourself. If you want to be an active investor it’s time for you to write the check, as awful as it sounds, that’s the truth.
